ANNUALREPORT2015. Mitsubishi UFJ Investor Services & Banking (Luxembourg) S.A. amy a. e / rang

Transcription

1 ANNUALREPORT2015 C Ch romo rang e / M. MWirth / A la amy a Mitsubishi UFJ Investor Services & Banking (Luxembourg) S.A.

2 TABLE OF CONTENTS Message from Management 3 CSR Today 4 Performance Highlight 6 Financial Highlight 8 Profile 10 Board of Directors 12 Corporate Governance Structures 16 Organization Chart 17 Management Report 18 Balance Sheet and Off Balance Sheet Items 22 Profit and Loss account 25 Note to the Accounts 26 Auditor s Report 46 Appendix 1 IFRS Report 48 Appendix 2 Basel II Disclosure 50 ANNUALREPORT2015 1

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4 MESSAGE FROM MANAGEMENT As of the 1st May 2016, Mitsubishi UFJ Global Custody S.A. changed its name to Mitsubishi UFJ Investor Services & Banking (Luxembourg) S.A. (MIBL). Since the establishment of the Bank, the Bank has been focusing on Global Custody services as well as Fund Administration services. In addition, according to the expansion plan of the global investor services unit by the Mitsubishi UFJ Financial Group (MUFG), the Bank has started to provide banking services to a wide range of global clients. By including «Investor Services» as part of the company name, we highlight that MIBL is a member of «MUFG Investor Services» which is a global brand of MUFG, and also by including «Banking», we express that MIBL is a bank with a universal banking license located in Luxembourg. Ko TERAWAKI Managing Director May 1, 2016 ANNUALREPORT2015 3

5 CORPORATE SOCIAL RESPONSIBILITY (CSR) Today, all Mitsubishi UFJ Financial Group (hereinafter MUFG ) companies subscribe to the corporate principles promulgated throughout the Mitsubishi Group, known as the Principles of Ethics and Conduct. These principles are: Customer Focus, Responsibility as a Corporate Citizen, and Ethical and Dynamic Workplace through Business. Mitsubishi UFJ Investor Services & Banking (Luxembourg) S.A. (MIBL), as a financial institution established under the laws of the Grand Duchy of Luxembourg, is regularly involved in host country initiatives that embrace the realization of a sustainable society. In 2015, our involvement in CSR activities ranged from our participation at the Relay for Life 2015 to raise funds for cancer research, to charitable contributions, as for example the donation of the Japanese stand at the International Bazaar whose proceeds are used to finance humanitarian projects in developing countries. Our efforts also extend to the campaign for the use of public transportation, to the promotion of saving energy, and the advancement of recycling in order to reinforce our responsibility towards the environment. 4

6 Anna na Stowe Travel /Alamy Relay for Life 2015 ANNUALREPORT2015 5

7 PERFORMANCE HIGHLIGHT The world economy showed unstable movements in 2015, due to the continuously low price of crude oil, the China Shock in August, the Greek s Debt crisis, the Paris Terror attacks in November and the US economic recovery with rising interest rate by FED in December and the economic prospects remain uncertain. In the Custody business, the assets under custody reached the amount of 387 billion as of December 31, 2015, which indicates an increase of 10% compared to December 31, As for the Fund Administration business, the number of Funds (including sub-funds) administered by the Bank decreased from 199 as of December 2014 to 167 as of December During the year 2015, 13 new funds (including sub-funds) were launched. The total assets of the new funds launched in 2015 have reached 1,3 billion based on the Net Asset Value calculation as of 31 December However, due to the decrease of the total number of Funds, the total NAV of Funds decreased to 20,6 billion at year end 2015 ( 28,6 billion at the end of 2014). Clients Assets Balances ( billion) Investment Funds Fiduciary Global Custody

8 Anna na Stowe Travel /Alamy The Market of UCIs in Luxembourg Total Value (EUR billion) Total Number Total Value of Funds Total Number of Funds ANNUALREPORT2015 7

9 FINANCIAL HIGHLIGHT For the year ended December 31, 2015, the Bank reported an operating income of thousand, as compared to thousand for the previous fiscal year. The decrease of thousand or 5,63%, comes mainly from the net commission income. In 2015, the net interest income increased due to rising liquidities and interest rates, whilst net commission from the Investment Funds business decreased. On the other hand, general administrative expenses have increased by thousand to thousand in 2015, mainly due to personnel and system costs. The Bank has created a provision of thousands to cover estimated US tax liabilities. Net operating profit before income taxes in 2015 decreased by thousand to thousand, as compared to thousand as at December

10 Anna na Stowe Travel /Alamy Total Operating Income & Net Commission Operating income Net commission ANNUALREPORT2015 9

11 PROFILE Mitsubishi UFJ Investor Services & Banking (Luxembourg) S.A. (MIBL) is a jointly-owned subsidiary of Mitsubishi UFJ Trust and Banking Corporation (MUTB) and The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU), two major members of the Mitsubishi UFJ Financial Group (MUFG), one of the largest financial groups worldwide. For more than 40 years, MIBL has been providing a wide range of services to institutional investors including: 1. Global Custody Services 2. Administration of Investment Funds 3. Administration of Fiduciary and Trust Accounts 4. Listing on the Stock Exchange 5. other direct or indirect related services (Cash Management, Foreign Exchange, etc.) 10

12 Anna na Stowe Travel /Alamy Mitsubishi UFJ Investor Services & Banking (Luxembourg) in Mitsubishi UFJ Financial Group Network Mitsubishi UFJ Financial Group (MUFG) Mitsubishi UFJ Securities Holdings Bank of Tokyo Mitsubishi UFJ (BTMU) Mitsubishi UFJ Trust & Banking (MUTB) Mitsubishi UFJ Morgan Stanley Securities Mitsubishi UFJ Kokusai Asset Management 30% 67% Mitsubishi UFJ Investor Services & Banking (Luxembourg) S.A. (MIBL) Master Trust Bank of Japan 3% Mitsubishi UFJ Trust International MU Investments Mitsubishi UFJ Fund Services Mitsubishi UFJ Welth Management Bank Swizerland 100% 100% Mitsubishi UFJ Asset Management UK Mitsubishi UFJ Investor Services MUFG Lux Management Company S.A. CAPITAL ALLIANCE MIBL Global Market Coverage North America USA, Canada,... (4 Nations) Europe France, Germany,... (33 Nations) Asia China, India,... (27 Nations) Africa Rep. of South Africa, Egypt,... (13 Nations) South America Brazil, Chile,... (11 Nations) Oceania Australia & NewZealand (2 Nations) ANNUALREPORT

13 BOARD OF DIRECTORS CHAIRMAN DIRECTORS Eiji IHORI, Tokyo (from June 26, 2014) Executive Officer, Trust Assets Planning Division Mitsubishi UFJ Trust and Banking Corporation 4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo , JAPAN Katsutoshi KUNIMOTO, Tokyo (resigned from April 2, 2015) Senior Deputy General Manager, Trust Assets Planning Division Mitsubishi UFJ Trust and Banking Corporation 4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo , JAPAN Jiro OMORI, Tokyo (from April 2, 2015) General Manager, Investor Services Business Division Mitsubishi UFJ Trust and Banking Corporation 4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo , JAPAN Ray Paul WINTERS, London (from February 28, 2014) Managing Director & Chief Executive Mitsubishi UFJ Trust International Limited, 24 Lombard Street, London EC3V 9AJ, UK 12

14 Anna na Stowe Travel /Alamy Manabu TANAKA, Tokyo (from June 26, 2014) General Manager, Asset Management and Administration Business Division The Bank of Tokyo-Mitsubishi UFJ, LTD. 7-1, Marunouchi 2- chome, Chiyoda-ku, Tokyo , JAPAN Ko TERAWAKI, Luxembourg (from June 8, 2015) Managing Director Mitsubishi UFJ Global Custody S.A , Route d Arlon - L-1150 LUXEMBOURG Eiji IHORI, Tokyo (from June 28, 2011) Executive Officer, Trust Assets Planning Division Mitsubishi UFJ Trust and Banking Corporation 4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo , JAPAN Masashi KURABE, Luxembourg (from April 18, 2014) Deputy Managing Director Mitsubishi UFJ Global Custody S.A , Route d Arlon - L-1150 LUXEMBOURG Hisakata ISOMURA, Luxembourg (resigned from June 8, 2015) Managing Director Mitsubishi UFJ Global Custody S.A , Route d Arlon - L-1150 LUXEMBOURG ANNUALREPORT

15 Corporate Governance Structure Controls Nomination Committee The Board of Directors First line of defence Second line of defence Third line of defence Day -to-day business General Management Practical Business Lines Risk Management Compliance Internal Audit Executive Committee Stategic and non recurrent affairs Credit and ALM Committee System Steering Committee PPP Committee New business & Product Approval Committee Pricing & Valuation Committee Risk Management Committee Compliance Oversight Meeting Depositary Oversight Committee 14

16 Anna na Stowe Travel /Alamy FREQUENCY OF THE MEETING Board of Directors: Nomination Committee: Executive Committee: Credit and ALM Committee: System Steering Committee: Portofolio, Program and Project Committee: New business & Product Approval Committee: Pricing & Valuation Committee: Risk Management Committee: Compliance Oversight Meeting: Depositary Services Committee: Quarterly Ad-hoc basis Monthly Monthly Quarterly Weekly Ad-hoc basis Monthly Monthly Monthly Monthly ANNUALREPORT

17 CORPORATE GOVERNANCE STRUCTURES The General Meeting of Shareholders is the highest decision-making body in the Bank. By adopting the articles of incorporation, the shareholders have agreed to transfer the most extensive administrative powers, including the power to delegate, to the Board of Directors, keeping for themselves only the powers reserved by law to the shareholders meeting. The Board of Directors has in turn delegated the day-to-day management of the company to the General Management ( Authorized Management ), presently composed of two directors, the Managing Director and the Deputy Managing Director. General Management has organized the Bank into such business lines as is necessary to meet legal requirements and to accomplish the Bank s day-to-day objectives. In order to further strengthen corporate governance and to improve active risk management, as is necessary for a sound organization, the Board of Directors decided in 2010 to reorganize the Bank s committee structure by more clearly defining committees subjects to be treated, duties, and reporting lines, and by creating a management committee in charge of all strategic and non-recurrent affairs of the Bank, named the Executive Committee. The business of the Bank is subject to a three-level control system. The first line of defense occurs within the business lines themselves, which have primary responsibility for any action undertaken, and as a consequence, have been organized in such a manner that each action is carefully checked before being released. The second line is formed by the support functions, including the Compliance and the Risk Control Functions. The Risk Management Function comprises both the Risk Management Department and the Risk Management Committee overseeing Operational Risk Management. The regular Risk Management Report is delivered for approval to the Board of Directors each quarter. The Compliance Function is subdivided into the Compliance Department, the regular Compliance Oversight Meeting, and the New Business and Product Approval Committee. It ensures the Bank s recognition of and adherence to all applicable laws and regulations, as well as to rules issued by other relevant entities. This function has the authority to contact at will, and reports directly to, the Board of Directors. General Management and the Executive Committee are part of, and supervise, the first two levels of controls. They also supervise insofar as necessary and required the third level control. The third-level consists of the Internal Audit Function, which in turns provides an independent, objective, and critical review of the first two lines of defense. The third level of control, in cooperation with General Management and the Executive Committee, has to ensure the soundness and appropriateness of the Bank s activity. It has the authority to report directly, in case of need or if so required, to the Board of Directors and to regulatory authorities and external auditors, in addition to the Head Office. 16

18 Anna na Stowe Travel /Alamy ORGANIZATION CHART MUTB COMPLIANCE DIV. Compliance Risk Management BOARD OF DIRECTORS External Auditor GENERAL MANAGEMENT Human Ressources Legal Compliance Risk Management Accounting Corporate Planning & General Administration Dublin Branch Internal Audit MUTB Audit Div. Chief Information Officer Chief Business Development Officer Chief Marketing Officer Head of Depositary & Custody Services Head of Banking Services Fund Administration Treasury & Asset Management Project Management Office IT Planning IT Services Sales & Customer Services Sales Operations Depositary Services Custody Services Account Management ANNUALREPORT

19 THE MANAGEMENT REPORT December 31, 2015 Mitsubishi UFJ Global Custody S.A. (the Bank ) Financial Results 2015 For the year ended December 31, 2015, the Bank reported an operating income of thousand, as compared to thousand for the previous fiscal year. The decrease of thousand or 5,63%, comes mainly from the net commission income. In 2015, the net interest income increased due to rising liquidities and interest rates, whilst net commission from the Investment Funds business decreased. On the other hand, general administrative expenses have increased by thousand to thousand in 2015, mainly due to personnel and system costs. The Bank has created a provision of thousands to cover estimated US tax liabilities. Net operating profit before income taxes in 2015 decreased by thousand to thousand, as compared to thousand as at December As of December 31, 2015, the total balance sheet amounted to 3.642,5 million versus 2.348,4 million as at December The Liquidity Coverage Ratio (LCR) introduced by the regulation (EU) No 575/2013 of the European Parliament, was 285% in December The Solvency Ratio amounted to 16% (prior to the payment of the dividend). Both ratios are well above the statutory minimum requirements. The Return on Assets (ROA) ratio was 0,36% as at December 31, The Board of Directors will propose, at the Ordinary Meeting of Shareholders, that the amount of ,34 consisting of the profit brought forward of ,28, the available reserve for Net Worth Tax from the year 2010 of ,00, and the net profit of the financial year ended December 31, 2015 of ,06 be allocated as follows: Allocation to other reserve (Net Worth Tax) ,00 Allocation to free reserve ,00 Dividends Class A Shares dividend 0,00 Class B Shares dividend ,23 Profit carried forward 1.346,11 Total ,34 In addition the Board of Directors will propose the transfer of ,00 from the Free Reserve to the Reserve for Net Worth Tax in order to fully benefit from the Net Worth Tax reduction for year As of December 31, 2015, the Bank had not acquired any of its own shares. Business Circumstances in 2015 The world economy showed unstable movements in 2015, due to the continuously low price of crude oil, the China Shock in August, the Greek s Debt crisis, the Paris Terror attacks in November and the US economic recovery with rising interest rate by FED in December and the economic prospects remain uncertain. In the financial markets, the FED announced the first rise in US interest rates since 2006 in December. On the other hand, the ECB announced that it will continue a monetary easing policy including imposing negative interest rates and an expanded asset purchase programme in December, which was less than expected. In terms of the foreign exchange market, Japanese Yen moved uncertainly against the US Dollar according to the various economic events and the rising prediction of US interest rate. The US Dollar remained strong against other currencies, including the EUR, in the context of steady US economic growth. Within this market environment and due to a positive investment attitude of some significant clients, the Bank s total client assets were gradually increased. 18

20 Anna na Stowe Travel /Alamy In terms of the financial activities of the Bank, the Bank s Net Interest Income increased due to the client deposits increase throughout the year, despite continuously low short-term interest rates in the major currencies. Business Achievement in 2015 The Bank s profit fell down 32% compared to 2014 mainly due to the decrease of the assets under administration and increase of the low-profitability clients despite of the assets under custody increase. In the Custody business, the assets under custody reached the amount of 387 billion as of December 31, 2015, which indicates an increase of 10% compared to December 31, As for the Fund Administration business, the number of Funds (including sub-funds) administered by the Bank decreased from 199 as of December 2014 to 167 as of December During the year 2015, 13 new funds (including sub-funds) were launched. The total assets of the new funds launched in 2015 have reached 1,3 billion based on the Net Asset Value calculation as of December 31, However, due to the decrease of the total number of Funds, the total NAV of Funds decreased to 20.6 billion at year end 2015 ( 28,6 billion at the end of 2014). [Robust financial foundation] The Bank has obtained A+ as long term counterparty rating by Standard and Poor s (S&P). It views the Bank as a core subsidiary of Mitsubishi UFJ Financial Group (MUFG) based on its strong integration with the group. [Banking Product Enhancement] New Banking products have been launched in order to meet the one-stop shop service requirement of clients. The Bank provides day to day cash management services through MUGC Globeview, the Bank s web platform. This product aims at servicing alternative investment type of funds, which don t hold bonds or equities in custody accounts. Another new product is Fund order desk, which provides order routing/settlement, cash management and reporting service to fund of funds. [Dublin Branch] The branch was authorised to provide services to Irish Authorised Investment Funds by the Central Bank of Ireland. The goal behind the opening of the branch was to expand the fund services offering in Ireland, by adding a depositary and custody function following MUFG Investor Services strategy. The Bank has now resolved to offer a comprehensive fund solution in Luxembourg, Dublin, and the Cayman Islands, which are the three major fund domiciliation centres of cross boarder funds globally. Risk Management (Risk Control Function) In 2015, the core business strategy of the Bank remained Japan-centered, with the vast majority of the Bank s clients being located in Japan. However, the bank started to increase its business toward non-japanese clients. As Fund Administration and Custody, along with ancillary activities in the provision of hedging services for clients, remained MUGC s main business lines, the Bank continues to mitigate the risks associated with these activities. Given this environment, Management s major objective is, in addition to monitoring and controlling the Bank s business-related risks (e.g. credit, market, liquidity and operational risk), to foresee, prevent or mitigate these risks before they have an impact. To accomplish these objectives, the Risk Management Department is continuously strengthening its current controls and strives to implement improved measures. Some of the comprehensive risk categories that are of utmost relevance to the Bank are the following: ANNUALREPORT

21 Credit Risk The Risk Control Function is in charge of monitoring counterparty credit risk on a daily basis through the monitoring of exposures towards the Bank s counterparties. A thorough risk management process is in place to monitor limit breaches, apply appropriate corrective measures when breaches occur, and escalate these events when necessary, to Management. Funding Liquidity Risk The Treasury Department is responsible for controlling and managing funding operations, whereas Risk Control is in charge of monitoring on a daily basis compliance with internal standards for appropriate control and management of Funding Liquidity Risk. In particular, Risk Control monitors the daily development of the Liquidity Coverage Ratio (LCR: internal minimum level for the LCR is 70%, regulatory level is 60%). The calculation of the NSFR and the Leverage Ratio started. Market Risk As of December 31, 2015, the Bank s exposure to market risk was limited; there were no speculative positions and the Bank did not hold a securities portfolio. In addition, the Bank assures a careful control over Interest Rate Risk via the calculation of an assets and liabilities duration gap, from both the mark-to-market perspective, and an earnings point of view. Operational Risk Operational Risk is the risk category the Bank dedicates the most effort to. It can be defined as the risk of an inadequate or failed process. It is monitored on a regular basis and it will be a major part of the Bank s Risk Management plans in 2014 and Important Operational Risks in the Bank are as follows: <Operations Risk> The Bank ensures a detailed focus on the effectiveness of its Operations Risk Management, by using the CSA and Risk Self-Assessment Reports and other tools. In addition, the Bank incorporates the impacts of external changes (e.g. new regulations or added complexity to our business due to client requests) in the Bank s risk policies and procedures. In 2016 the Bank will replace the CSA with two new assessments approach, the Operational Risk Self-Assessment (ORSA) and the Operational Risk Quality Assessment (ORQA) to increase the quality of the Operational Risk Management. <Settlement Risk> It is the risk of non-receipt of funds from counterparties, or an associated risk with settlements. As an example, internal system developments have significantly improved the performance of the Bank s automated intra-day cash reconciliation. <Information Security> The main objective of the Information Security Risk Assessment is to assess the Bank s risk exposure to the mishandling of its (confidential) information and therefore ensure that its efforts to mitigate this risk are properly targeting potential vulnerabilities. The Bank has established proper measurement in its controls, trained its staff, issued an information security handbook, and revamped the quarterly security questionnaire that all staff should fill-in. Logical security tools and techniques are administered to restrict access to programs, data and other information resources. User rights per software platform are reviewed on a regular basis by the IT Manager, the Internal Auditor and the Information Security Officer (Deputy Managing Director). <Outsourcing Risk> In 2015, the Bank reviewed its approach to Outsourcing Risk by implementing a new risk assessment method for outsourcing contractors. In 2016, the Bank will focus on outsourcing providers with a high residual risk and perform due diligence visits where applicable. Outsourcing Risk is regularly discussed in the planned meetings of the Risk Management Committee in order to closely monitor this type of risk. 20

22 Anna na Stowe Travel /Alamy Risk Strategy In conclusion, in compliance with the legal and regulatory mandates and for the purpose of protecting the institution and its reputation, the Bank s Board of Directors approves notably the Bank s risk strategy, including its risk appetite, risk tolerance and the guiding principles governing risk identification, measurement, reporting, treatment, and monitoring. ICAAP and Recovery Plan In line with regulatory rule and guidelines, we conducted Stress Tests in the major risk types (credit, market, operational, liquidity) for the ICAAP and setup a Business Recovery Plan according the Business Recovery and Resolution Directive (BRRD). Based on Reverse Stress Tests (extreme stress scenarios for the bank), the Recovery Plan allows the bank to take actions for a business recovery in case of a severe business or economic downturn which hit the bank severely and avoids bankruptcy and resolution of the bank. For this, recovery options are defined that the bank could take in order to restore its capital base, liquidity position or profitability. Given the results of the ICAAP Stress Tests and the setup of the Recovery Plan, the bank is quite stable in particular in case of sudden economic downturns. Mitsubishi UFJ Investor Services & Banking (Luxembourg) S.A. Aligning with MUFG Investor Services strategy, the Bank will enhance our services both investor service products and banking products in order to meet client expectation. In addition to above, the Bank will invest its resources into further improving its existing services, and will seek to increase cooperation within the MUFG group in an effort to strengthen the brand and increase client satisfaction. Furthermore, there have been no events in 2015 which had a material impact on the financial figures of the Bank as presented as of December 31, Ko TERAWAKI Managing Director March 10, 2016 Business Plan for 2016 In order to expand the client base especially in non- Japanese markets, the Bank is planning to further enhance its service offering and close collaboration within the MUFG group. The Bank intends to provide various services related to a wider range of alternative funds, such as private equity and infrastructure, in addition to traditional funds through arrangements with MUFG group companies. We are delighted to announce the name of the Bank will be changed in 2016 as follows, as per correspondence and approval received from CSSF. ANNUALREPORT

23 BALANCE SHEET December 31, 2015 (expressed in ) A S S E T S Notes Cash, balances with central banks and post office banks 29.1., Loans and advances to credit institutions 3, 15, 29.1., a) repayable on demand b) other loans and advances Loans and advances to customers 29.1., Shares and other variable-yield securities 4, 15, 29.1., Shares in affiliated undertakings 4, 5, Tangible assets Other assets Prepayments and accrued income 6, TOTAL ASSETS The accompanying notes form an integral part of the annual accounts. 22

24 Anna na Stowe Travel /Alamy L I A B I L I T I E S Notes Amounts owed to credit institutions 15, a) repayable on demand Amounts owed to customers 8, 15, a) repayable on demand Other liabilities Accruals and deferred income 10, Provisions a) provisions for taxation b) other provisions Subscribed capital Reserves Result brought forward Profit for the financial year TOTAL LIABILITIES ANNUALREPORT

25 OFF BALANCE SHEET ITEMS December 31, 2015 (expressed in ) Notes Contingent liabilities 17, of which: guarantees and assets pledged as collateral security FIDUCIARY OPERATIONS The accompanying notes form an integral part of the annual accounts. 24

26 Anna na Stowe Travel /Alamy PROFIT AND LOSS ACCOUNT Year ended December 31, 2015 (expressed in ) Notes Interest receivable and similar income of which: - Negative interest received on deposits Interest Gain from foreign currency swap Interest payable and similar charges ( ) ( ) of which: - Negative interest paid on loans and advances ( ) (13.049) - Interest Loss from foreign currency swap (17.112) (83.002) Income from securities Income from shares and other variable yield securities Commission receivable Commission payable ( ) ( ) Net profit on financial operations Other operating income General administrative expenses ( ) ( ) a) staff costs 23, 24 ( ) ( ) of which: - wages and salaries ( ) ( ) - social security costs ( ) ( ) of which: - social security costs relating to pensions ( ) ( ) b) other administrative expenses 25 ( ) ( ) Value adjustments in respect of tangible and intangible assets ( ) ( ) Other operating charges 22 ( ) (85.251) Provision for contingent liabilities and for commitment 12 ( ) 0 Tax on profit on ordinary activities 11, ( ) ( ) Profit on ordinary activities after tax Other taxes not shown under the preceding items ( ) ( ) PROFIT FOR THE FINANCIAL YEAR ANNUALREPORT

27 NOTES TO THE ACCOUNTS December 31, 2015 NOTE 1 - GENERAL 1.1. Corporate matters Mitsubishi UFJ Global Custody S.A. ( the Bank ) was incorporated in Luxembourg on April 11, 1974 as a société anonyme. On April 1, 1996, the Parent Bank, The Bank of Tokyo, Ltd., merged with The Mitsubishi Bank, Limited to form The Bank of Tokyo-Mitsubishi Ltd., and Bank of Tokyo (Luxembourg) S.A. changed its name to Bank of Tokyo- Mitsubishi (Luxembourg) S.A.. On October 1, 2005, the indirect shareholder, Mitsubishi Tokyo Financial Group, Inc. (MTFG) merged with UFJ Holdings, Inc. (UFJ) and formed a new financial group, Mitsubishi UFJ Financial Group (MUFG). On January 1, 2006, the Parent Bank, The Bank of Tokyo- Mitsubishi, Ltd. merged with UFJ Bank Limited to form The Bank of Tokyo-Mitsubishi UFJ Ltd., and Bank of Tokyo- Mitsubishi (Luxembourg) S.A. changed its name to Bank of Tokyo-Mitsubishi UFJ (Luxembourg) S.A.. On April 2, 2007, the company became a jointly capitalized subsidiary of Mitsubishi UFJ Trust and Banking Corporation by 70% and Bank of Tokyo-Mitsubishi UFJ Ltd. by 30%, which are under the same holding company Mitsubishi UFJ Financial Group (MUFG). Consequently, Bank of Tokyo-Mitsubishi UFJ (Luxembourg) S.A. changed its name to Mitsubishi UFJ Global Custody S.A. (MUGC). On April 28, 2008, Mitsubishi UFJ Global Custody S.A., has issued new shares and the capital of the company has been increased by ,52. The total subscribed share capital is currently set at ,52. The two major shareholders of MUGC hold 92,25% of the capital, Mitsubishi UFJ Trust and Banking Corporation by 63,72% and Bank of Tokyo-Mitsubishi UFJ Ltd. by 28,53%. registered as credit institution pursuant to UE Regulation, 1993, under the number The members of the Board of Directors are Senior Executives of Mitsubishi UFJ Trust and Banking Corporation Group and The Bank of Tokyo-Mitsubishi UFJ Ltd. Group. The business policy and valuation principles, unless prescribed by the legal requirements existing in Luxembourg, are determined and monitored by the Board of Directors in accordance with those applied in Mitsubishi UFJ Financial Group Nature of business The object of the Bank is the undertaking for its own account, as well as for the account of third parties either within or outside the Grand-Duchy of Luxembourg, of any banking or financial operations, as well as all other operations, whether industrial or commercial or in real estate, which directly or indirectly relate to the main object described above. More specifically, the Bank concentrates its activities on investment management services. A significant volume of the Bank s transactions is concluded directly or indirectly with companies of The Bank of Tokyo-Mitsubishi UFJ Ltd. Group Annual accounts The Bank prepares its annual accounts in US Dollars (), the currency in which the capital is expressed. The Bank s accounting year coincides with the calendar year. On August 7, 2014, Mitsubishi UFJ Global Custody S.A. has established an external branch located at Ormonde House, lower Lesson Street, Dublin 2, Ireland. Mitsubishi UFJ Global Custody S.A., Dublin Branch is 26

28 Anna na Stowe Travel /Alamy NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Bank prepares its annual accounts under the historical cost principle in accordance with the laws and regulations in force in the Grand-Duchy of Luxembourg and on the basis of accounting principles generally accepted in the banking sector in the Grand-Duchy of Luxembourg. In observing these, the following significant accounting policies are applied The date of recording of transactions in the balance sheet Assets and liabilities are stated in the balance sheet on the date the amounts concerned become cleared funds, that is, on their date of effective transfer Foreign currencies The Bank maintains a multi-currency accounting system which records all transactions in the currency or currencies of the transaction, on the day on which the contract is concluded. Assets and liabilities are converted into at the spot exchange rates applicable at the balance sheet date. Both realised and unrealised profits and losses arising on revaluation are accounted for in the profit and loss account for the year, except for those resulting from items specifically covered by a forward foreign exchange contract (swap and hedging forward foreign exchange contract) which are recorded at historical exchange rates. Revenues and expenses in foreign currencies are translated into daily at the prevailing exchange rates. At the year-end, all unsettled forward transactions are translated into at the forward rate prevailing on the Balance Sheet date for the remaining maturities. Results on unsettled forward transactions linked to spot transactions and on swap transactions are accrued at the balance sheet date. The revaluation of these transactions does not affect the result of the financial year Financial instruments derivatives The Bank s commitments deriving from the derivatives financial instruments such as interest rate swaps, forward rate agreements, financial futures and options are recorded on the transaction date among the off balance sheet items. At the year-end, where necessary, a provision is set up in respect of individual unrealised losses resulting from the revaluation of the Bank s commitments at market value. The Bank has constituted a provision for forward derivatives Loss as of December 31, 2015 for an amount of (2014: 0). No provision is set up in those cases where a financial instrument clearly covers an asset or a liability and economic unity is established or where a financial instrument is hedged by a reverse transaction so that no open position exists Specific value adjustments in respect of doubtful and irrecoverable debts It is the Bank s policy to establish specific value adjustments in respect of doubtful and irrecoverable debts, as deemed appropriate by the Board of Directors. Value adjustments, if any, are deducted from the assets to which they relate Value adjustments for possible losses on bills, loans and advances and leasing transactions The value adjustments for possible losses on loans and advances, if any, are deducted from the assets to which they relate Lump-sum provision for risk exposures In accordance with the Luxembourg tax legislation, the Bank can establish a lump-sum provision for risk exposures, as defined in the legislation governing ANNUALREPORT

29 prudential supervision of banks. The purpose of the provision is to take account of risks which are likely to crystallise but which have not yet been identified as at the date of preparation of the annual accounts. Pursuant to the Instructions issued by the Directeur des Contributions on December 16, 1997, this provision should be made before taxation and should not exceed 1,25% of the Bank s risk exposures. The Bank has not constituted any provision as of December 31, 2015 (2014: 0) Transferable securities Transferable securities are recorded initially at their purchase price. The average cost method is used for initial recognition. Value adjustments, calculated as described in note 2.5. or arising from a diminution of value, are deducted from the account balance Tangible and intangible assets Tangible and intangible assets are valued at purchase price. The value of tangible and intangible fixed assets with limited useful economic lives is reduced by value adjustments calculated to write off the value of such assets systematically over their useful economic lives as follows: 2.9. Shares in affiliated undertakings At the Balance Sheet date, shares in affiliated undertakings held as financial fixed assets are stated at the lower of cost or market value Taxes Taxes are accounted for on an accruals basis in the accounts of the year to which they relate Prepayment and accrued income This asset item includes expenditure incurred during the financial year but relating to a subsequent financial year Accruals and deferred income This liability item includes income received during the financial year but relating to a subsequent financial year Provisions Provisions are intended to cover losses or debts the nature of which is clearly defined and which, at the date of the balance sheet are either likely to be incurred or certain to be incurred but uncertain as to their amount or as to the date on which they will arise. > Hardware equipment: 4 years; > Software: 4 years and 5 years; > Other intangible assets: 5 years; > Other tangible assets: 10 years. 28

30 Anna na Stowe Travel /Alamy NOTE 3 - LOANS AND ADVANCES TO CREDIT INSTITUTIONS Loans and advances to credit institutions other than those repayable on demand may be analysed according to their remaining maturity as follows: Not more than three months More than three months but less than one year NOTE 4 - TRANSFERABLE SECURITIES Transferable securities shown under the items Shares in affiliated undertakings and Shares and other variable yield securities consist entirely of unlisted securities for and (2014: and ). Summary of shares in affiliated undertakings At December 31, 2015, the Bank held at least 20 % of the capital of the following companies: Cost Capital held Capital and reserves at 31/12/2015 Result for the year ended 31/12/2015 % MUGC LUX MANAGEMENT S.A % MITSUBISHI UFJ INVESTOR SERVICES Limited % As of December 31, 2015, the share capital of MUGC LUX MANAGEMENT S.A. and MITSUBISHI UFJ INVESTOR SERVICES Limited amount respectively to EUR ,83 and JPY respectively (2014: EUR ,83 and JPY respectively). ANNUALREPORT

31 NOTE 5 - MOVEMENTS IN FIXED ASSETS The following movements have occurred in the Bank s fixed assets in the course of the financial year: FIXED ASSETS: Gross value at the beginning Additions Disposals of the financial year 1. Shares in affiliated undertakings Tangible assets (56.311) a) Hardware (54.339) b) Software c) Other fixtures and fittings, flat furniture, equipment and vehicles (1.972) 3. Intangible assets Goodwill acquired for valuable Consideration Goodwill acquired for valuable consideration represents the value of the takeover of part of the client base of another institution. NOTE 6 - PREPAYMENTS AND ACCRUED INCOME The Bank s prepayments and accrued income may be analysed as follows: Prepaid income taxes Accrued interest income Prepaid general expenses Commission on fiduciary operations Commission on global custody Commission on investment funds Other prepayments Advance paid to IRS, US Tax authorities VAT recoverable Neutralization of foreign exchange results on position covered by foreign exchange swap Commission from Management Company Other accrued income

32 Anna na Stowe Travel /Alamy Exchange Gross value at Cumulative Net value difference the end of the value at the end of the financial year adjustments financial year ( ) ( ) ( ) ( ) ( ) ANNUALREPORT

33 NOTE 7 - FOREIGN CURRENCY ASSETS At December 31, 2015, the aggregate amount of the Bank s assets denominated in foreign currencies, translated into, is (2014: ). NOTE 8 - AMOUNTS OWED TO CUSTOMERS As at December 31, 2015, debts other than those repayable on demand amounted to 0 (2014: 0). NOTE 9 - OTHER LIABILITIES The Bank s other liabilities may be analysed as follows: Preferential creditors Sundry creditors NOTE 10 - ACCRUALS AND DEFERRED INCOME The Bank s accruals and deferred income may be analysed as follows: Accrued interest expenses Accrued general expenses Accrued commission Other accrued expenses Other suspense receipt NOTE 11 - TAXATION - EXCHANGE DIFFERENCE: DEFERRED TAXATION Under Luxembourg fiscal regulations, the Bank s fiscal Balance Sheet and its results of operations are required to be expressed in Euro. The earnings of the Bank as determined for fiscal purposes can differ substantially from earnings reported for accounting purposes as a result of unrealised profits or losses on the translation of the Bank s equity into Euro equivalents for fiscal purposes. In accordance with the Law of July 16, 1987 (as modified), which allows the fiscal neutralisation of translation gains on exchange on the investment of equity in banks, unrealised gains which may be caused by a rise in the against the Euro can, under normal circumstances, be neutralised to the extent of the amount that exceeds the unrealised translation losses previously carried forward. In accordance with the Law of July 23, 1983, however, which allows the fiscal neutralisation of translation gains on exchange on the investment of equity in banks, future unrealised gains which may be caused by a rise in the US dollar against the Euro can, under normal circumstances, only be neutralised to the extent of the amount that exceeds the unrealised translation losses previously carried forward. Consequently, unrealised translation losses on equity are considered to result from a timing difference and the Bank has provided for revenue taxes on the accounting income as deferred taxation. As at December 31, 2014, due to the depreciation of the Euro against US dollars, the foreign exchange gain on equity had compensated the accumulated negative position. The deferred tax liabilities had been reduced to 0 as of December As at December 31, 2015, Euro weakened more against US dollars and consequently, the Bank did not account for deferred tax

34 Anna na Stowe Travel /Alamy NOTE 12 - OTHER PROVISIONS The Bank s other provisions may be analysed as follows: Provision for remuneration Provision for unrealized losses on forward deals (note 2.3.) Provision for tax liabilities in relation with US taxes NOTE 13 - SUBSCRIBED CAPITAL The Bank s subscribed and fully paid up capital amounts to for shares of Class A and shares of Class B. NOTE 14 - MOVEMENTS IN RESERVES AND RESULT BROUGHT FORWARD Legal reserve Other reserves Result brought forward Balance at January 1, Profit for the year ended December 31, Appropriation of profit - Dividends paid to shareholders (19.651) - Transfer to reserves for Net Worth Tax ( ) - Transfer from Reserve for NWT 2009 ( ) Allocation to Free reserve ( ) Balance at December 31, Under Luxembourg law, the Bank must appropriate to a legal reserve an amount equivalent to at least 5% of the annual net profit until such reserve is equal to 10% of the share capital. This appropriation is made in the following year. Distribution of the legal reserve is restricted. This requirement is satisfied as the Bank has reached 10% of the issued subscribed capital. ANNUALREPORT

35 Based on the Luxembourg tax law, the Bank has elected to get a tax credit for all or part of the net worth tax due for that year. This tax credit is however, limited to the amount of the corporate income tax due for the previous year before the imputation of any tax credits. In order to profit from this credit, the Bank must commit itself to post before the end of the subsequent year an amount equal to five times the net worth tax credit to a special reserve, which has to be maintained for a period of five years. The Circular I. Fort. N 47bis issued by the Luxembourg Tax Authorities on 19 November 2015, provides for a dedicated rule allowing the taxpayer to create only one net wealth tax reserve to fully benefit from the Net Wealth Tax reduction for both 2014 and This reserve should correspond to five times the amount of the highest reduction available for 2014 and 2015 (transitional measure). The reserve for net worth tax is included in the Bank s other reserve for a total amount of (2014: ). As resolved in the Annual General Meeting dated March 27, 2015, the Bank has allocated an amount of to Reserve for Net Worth Tax and reversed the available Net worth tax constituted in 2009 which amounted to (EUR ). The accumulated balance of special reserve for Net Worth Taxes states as follows as at December 31, Reserve for Reserve for Net Worth Tax Net Worth Tax Years EUR Balance at December 31, In 2005, the Shareholders approved the creation of a special On-line costs reserve for a total amount of In the same year, the Bank used the amount of from this reserve to absorb the losses created by the special On-line costs. The remaining balance of is included in the Bank s other reserves as at December 31,

36 Anna na Stowe Travel /Alamy NOTE 15 - RELATED PARTY BALANCES As at December 31, 2015, the following balances with related parties are outstanding: ASSETS Loans and advances to credit institutions Shares in affiliated undertakings Prepayments and accrued income LIABILITIES Amounts owed to credit institutions Amounts owed to customers Accruals and deferred income At the request of the Bank, the CSSF has granted a total exemption for the exposures towards the group (Mitsubishi UFJ Financial Group) in the calculation of large exposure limits, in accordance with the Regulation (EU) No 575/2013 of June 26, 2013 (Part IV). As at December 31, 2015, the amount towards the group falling under this exemption amounts to and can be analysed as follows: 2015 Loans and advances to credit institutions Prepayments and accrued income Foreign exchange transactions (Market Risk method) The Bank has not entered into any significant transactions with related parties as defined in International Accounting Standards 24 Related Party Disclosures which were not made on terms equivalent to those that prevail in arm s length transactions as of December 31, 2015 and for the year then ended. ANNUALREPORT

37 NOTE 16 - FOREIGN CURRENCY LIABILITIES At December 31, 2015, the aggregate amounts of liabilities denominated in foreign currencies translated into is (2014: ). NOTE 17 - CONTINGENT LIABILITIES The Bank s contingent liabilities may be analysed as follows: Counter-guarantees issued As at the year-end, there were no related party balances. NOTE 18 - COMMITMENTS The Bank has entered into certain commitments which are not disclosed neither in the Balance Sheet nor in the Off Balance Sheet Items, but which are significant for the purposes of assessing the financial situation of the Bank. Details of such commitments are as follows: Commitments in respect of fixed rental payments contracted on buildings As at the year-end, there are no related party balances. NOTE 19 - OPERATIONS LINKED TO CURRENCY EXCHANGE RATES, INTEREST RATES AND OTHER MARKET RATES The following types of forward transactions are outstanding as at December 31, 2015 and 2014: Operations linked to currency exchange rates - Forward exchange transactions (swaps, outrights). Operations linked to the foreign currency exchange rates are made to a large extent for the purposes of covering the existing positions. NOTE 20 - INVESTMENT MANAGEMENT SERVICES AND UNDERWRITING FUNCTIONS Management and agency services provided by the Bank include: - Custody and administration of transferable securities; - Fiduciary representations; - Agency functions; - Portfolio management and advice. 36

38 Anna na Stowe Travel /Alamy NOTE 21 - OTHER OPERATING INCOME Adjustment of overpayment of VAT related to previous years Sub-Rental Fee received from the Management Company (Service level agreement) Income from the adjustment of general expenses regarding previous years Adjustment for commission previous years Other NOTE 22 - OTHER OPERATING CHARGES Charges from the adjustment of general expenses regarding previous years Commission previous years Interest on previous years Others operating losses NOTE 23 - STAFF NUMBERS The average number or persons employed during the financial year by the Bank is as follows: Number Number Senior management Middle management Employees ANNUALREPORT

39 NOTE 24 - MANAGEMENT REMUNERATION The Bank has granted emoluments in respect of the financial year to the members of the managerial body of the Bank by reason of their responsibilities as follows: Senior management During the financial year, no pension commitments to the members of the Board of Directors and General Management were made. As at December 31, 2015 and 2014, the Bank did not grant any advances and credits to the members of the Board of Directors and General Management. NOTE 25 - OTHER ADMINISTRATIVE EXPENSES Rent and related expenses Telecommunication expenses Professional fees Data charges Maintenance Travelling, moving, business trips Service fee System cost Service contracts Other expenses NOTE 26 - TAX Tax on profit on ordinary activities Corporate Income Tax Municipal Business Tax Other taxes not shown under the preceding items Net worth tax* VAT Other taxes * This represents minimum net worth tax due of EUR ( )

40 Anna na Stowe Travel /Alamy NOTE 27 - PARENT UNDERTAKING As of December 31, 2015, the Bank is a jointly capitalized subsidiary of Mitsubishi UFJ Trust and Banking Corporation by 63,72% and Bank of Tokyo-Mitsubishi UFJ Ltd. by 28,53%, which are under the same holding company Mitsubishi UFJ Financial Group (MUFG), which is incorporated under the laws of Japan and whose registered office is in Tokyo. The annual accounts of the Bank are included in the consolidated accounts of Mitsubishi UFJ Trust and Banking Corporation, with Registered Financial Institution number 33 at Kanto Local Finance Bureau Japan and registered address 4-5, Marunouchi 1-Chome, Chiyoda-Ku, Tokyo , Japan. The consolidated accounts of the holding company Mitsubishi UFJ Financial Group (MUFG) may be obtained from the head office at 7-1, Marunouchi 2-Chome, Chiyoda-Ku, Tokyo 100, Japan. NOTE 28 - DEPOSIT GUARANTEE SCHEME The law related to the resolution, reorganisation and winding-up measures of credit institutions and certain investment firms and on deposit guarantee and investor compensation schemes ( the Law ), transposing into Luxembourgish law the directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions and investment firms and the directive 2014/49/EU related to deposit guarantee and investor compensation schemes, was passed on December 18, The deposit guarantee and investor compensation scheme currently in place through the Association pour la Garantie des Dépôts Luxembourg (AGDL) will be replaced by a new contribution based system of deposit guarantee and investor compensation. This new system will cover eligible deposits of each depositor up to an amount of EUR and investments up to an amount of EUR The Law also provides that deposits resulting from specific transactions or fulfilling a specific social or other purpose are covered for an amount above EUR for a period of 12 months. The provisions which have been created in the past by credit institutions for the purpose of AGDL in their annual accounts will be used/released (depending on the accounting treatment chosen) according to the contributions of the banks to the new Luxembourg banking resolution fund Fonds de résolution Luxembourg (FRL), respectively to the new Luxembourg deposit guarantee fund Fonds de garantie des dépôts Luxembourg (FDGL), which is still to be established. The funded amount of the FRL shall reach by the end of 2024 at least 1% of covered deposits, as defined in article 1 number 36 of the Law, of all authorized credit institutions in all participating Member States. This amount will be collected from the credit institutions through annual contributions during the years 2015 to The target level of funding of the FGDL is set at 0,8% of covered deposits, as defined in article 163 number 8 of the Law, of the relevant credit institutions and is to be reached by the end of 2018 through annual contributions. The contributions are to be made in the form of annual payments during the years 2016 to For 2015, the credit institutions have reflected a provision of 0,2% of covered deposits in order to anticipate these contributions, using/releasing (depending on the accounting treatment chosen) the existing AGDL provision in their annual accounts. When the level of 0,8% is reached, the Luxembourgish credit institutions are to continue to contribute for 8 additional years in order to constitute an additional safety buffer of 0,8% of covered deposits as defined in article 163 number 8 of the Law. In 2015 the Bank has paid a contribution to the CSSF for (EUR ) for FRL. ANNUALREPORT

41 NOTE 29 - FINANCIAL INSTRUMENT DISCLOSURES Primary non-trading financial instruments As at December 31, 2015, the analysis of primary non-trading financial instruments (the Bank has no trading portfolio) by class and residual maturity is the following: 3 months > 3 months > 1 year > 5 years Total 1 year 5 years At carrying amount in FINANCIAL ASSETS Instrument class Cash on hand Balances with the BCL Loans and advances to credit institutions Loans and advances to customers Shares and other variable yield securities Total FINANCIAL LIABILITIES Instrument class Amounts owed to credit institutions Amounts owed to customers Off-balance sheet items disclosed as contingencies Guarantees and assets pledged as collateral security Total

42 Anna na Stowe Travel /Alamy As at December 31, 2014, the analysis of primary non-trading financial instruments (the Bank has no trading portfolio) by class and residual maturity is the following: 3 months > 3 months > 1 year > 5 years Total 1 year 5 years At carrying amount in FINANCIAL ASSETS Instrument class Cash on hand Balances with the BCL Loans and advances to credit institutions Loans and advances to customers Shares and other variable yield securities Total FINANCIAL LIABILITIES Instrument class Amounts owed to credit institutions Amounts owed to customers Off-balance sheet items disclosed as contingencies Guarantees and assets pledged as collateral security Total ANNUALREPORT

43 29.2. Derivative non-trading financial instruments As at December 31, 2015, the analysis of OTC derivative non-trading financial instruments (the Bank has no trading portfolio) by class and residual maturity is the following: 3 months > 3 months > 1 year > 5 years Total Fair value 1 year 5 years At notional payable amount in FINANCIAL ASSETS Instrument class Foreign exchange transactions Forwards Swaps Total FINANCIAL LIABILITIES Instrument class Foreign exchange transactions Forwards Swaps Total These amounts include OTC derivative non-trading financial instruments with a trade date before December 31, 2015 and a value date after December 31,

44 Anna na Stowe Travel /Alamy As at December 31, 2014, the analysis of OTC derivative non-trading financial instruments (the Bank has no trading portfolio) by class and residual maturity is the following: 3 months > 3 months > 1 year > 5 years Total Fair value 1 year 5 years At notional payable amount in FINANCIAL ASSETS Instrument class Foreign exchange transactions Forwards Swaps Total FINANCIAL LIABILITIES Instrument class Foreign exchange transactions Forwards Swaps Total These amounts include OTC derivative non-trading financial instruments with a trade date before December 31, 2014 and a value date after December 31, ANNUALREPORT

45 29.3. Information on credit risk on primary non-trading financial instruments As at December 31, 2015, the Bank is exposed to the following credit risk on primary non-trading financial instruments: FINANCIAL ASSETS By instrument class and geographic location Carrying amount Carrying amount in in Cash, balances with the BCL EU member countries Loans and advances to credit institutions EU member countries North & Central America Asia Europe, non-eu member countries Australia and New Zealand Loans and advances to customers EU member countries North & Central America Shares and other variable yield securities North & Central America EU member countries Total

46 Anna na Stowe Travel /Alamy Information on derivative non-trading financial instruments As at December 31, 2015, the Bank is exposed to the following credit risk on derivatives non-trading financial instruments: Notional/payable amount Risk equivalent amount in in FINANCIAL ASSETS By instrument class and geographic location Foreign exchange transactions Forwards EU member countries America Asia Swaps EU member countries Total As at December 31, 2014, the Bank is exposed to the following credit risk on derivatives non-trading financial instruments: Notional/payable amount Risk equivalent amount in in FINANCIAL ASSETS By instrument class and geographic location Foreign exchange transactions Forwards EU member countries America Asia Swaps EU member countries Total ANNUALREPORT

47 REPORT OF THE REVISEUR D ENTREPRISES AGREE Report on the annual accounts Following our appointment by the Board of Directors, we have audited the accompanying annual accounts of MITSUBISHI UFJ GLOBAL CUSTODY S.A., which comprise the Balance Sheet as at December 31, 2015 and the Profit and Loss Account for the year then ended, and a summary of significant accounting policies and other explanatory information. Responsibility of the Board of Directors for the annual accounts The Board of Directors is responsible for the preparation and fair presentation of these annual accounts in accordance with Luxembourg legal and regulatory requirements relating to the preparation of the annual accounts, and for such internal control as the Board of Directors determines is necessary to enable the preparation of annual accounts that are free from material misstatement, whether due to fraud or error. Responsibility of the réviseur d entreprises agréé Our responsibility is to express an opinion on these annual accounts based on our audit. We conducted our audit in accordance with International Standards on Auditing as adopted for Luxembourg by the Commission de Surveillance du Secteur Financier. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the annual accounts are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the annual accounts. The procedures selected depend on the réviseur d entreprises agréé s judgement, including the assessment of the risks of material misstatement of the annual accounts, whether due to fraud or error. In making those risk assessments, the réviseur d entreprises agréé considers internal control relevant to the entity s preparation and fair presentation of the annual accounts in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors, as well as evaluating the overall presentation of the annual accounts. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the annual accounts give a true and fair view of the financial position of MITSUBISHI UFJ GLOBAL CUSTODY S.A. as of December 31, 2015, and of the results of its operations for the year then ended in accordance with Luxembourg legal and regulatory requirements relating to the preparation of the annual accounts. 46

48 Anna na Stowe Travel /Alamy Report on other legal and regulatory requirements The management report, which is the responsibility of the Board of Directors, is consistent with the annual accounts. For Deloitte Audit, Cabinet de révision agréé Raphaël Charlier, Réviseur d entreprises agréé Partner March 14, 2016 ANNUALREPORT

49 APPENDIX 1 APPENDIX 1 IFRS Report The financial statements of this section are based on International Financial Reporting Standards (IFRS) and the deviations allowed by the CSSF for the preparation of the regulatory financial reporting. All figures are expressed in US Dollars. Balance and off-balance sheet accounts (Prudential reporting - FINREP) A Assets 2015 Cash and cash balances with central banks Financial assets held for trading Available-for-sale financial assets Loans and receivables Tangible assets Intangible assets Current tax asset Other assets Total assets B. Liabilities Financial liabilities held for trading Financial liabilities measured at amortized cost credit institutions other customers Provisions Current tax liabilities Deferred tax liabilities 0 0 Other liabilities Total Liabilities C. Own funds Issued capital Revaluation reserve Reserves Result for the year Total Own funds Total liabilities and Own funds

50 Anna na Stowe Travel /Alamy The principal elements of the Bank s off-balance sheet items are: (prudential reporting) Var in % Contingent liabilities and other off-balance sheet items: Financial Guarantees ,88 % Custody Assets from undertakings for collective investment (UCI) ,17 % Custody Assets from other professionals dealing on the financial markets ,54 % Fiduciary transactions ,00 % Profit and loss account (Prudential reporting - FINREP/IFRS) Financial & Operating income & expenses 1. Interest income Interest expense Net interest income (1+2) Dividend income Fee & commission income Fee & commission expenses Net Fee income (5+6) Realized gains (losses) on financial assets Net Gain on financial assets & liabilities held for trading Other operating income Other operating expenses Financial & Operating income & expenses ( ) Administration Costs: Staff expenses General & Administrative expenses Depreciation Provisions Profit before taxes ( ) Tax expenses on profit Profit for the year (16+17) ANNUALREPORT2015 APPENDIX 1 49

51 APPENDIX 2 APPENDIX 2 Basel II Disclosure Annual Report 2015 I. Introduction This report has been created in compliance with E.U. Directive 2013/36/EU of June 26, 2013, and E.U. Regulation 575/2013 of the same date. Basel II differentiates between three so-called pillars, which are expected to be mutually reinforcing: Pillar 1 is centred on the capital requirements related to the credit, market and operational risks that banks run; Under Pillar 2, banks are expected to produce their own assessment of capital adequacy, based on the risks that they face in their activities, including additional risk types such as market risk in the banking book. Pillar 2 also lays out the interaction between the banks own assessments and the banking supervisors response; Pillar 3 leverages the ability of market discipline to motivate prudent management by enhancing the degree of transparency in banks public reporting. It sets out the public disclosures that banks must make that lend greater insight into the adequacy of their capitalization. The purpose of Pillar 3 is to complement the minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2). Pillar 3 disclosures comprise of: Quantitative disclosures relating primarily to actual risk exposures Qualitative disclosures relating primarily to risk management practices Additional qualitative disclosures are applied by enclosing a summary of the Remuneration Policy. As at December 31, 2015, this disclosure Statement includes the measures required by the full adoption of the Basel III capital reforms. Basel III is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk, intended to strengthen bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. Mitsubishi UFJ Investor Services & Banking (Luxembourg) S.A. (hereafter MIBL or the Bank ), a member of Mitsubishi UFJ Financial Group (hereafter MUFG ), whose Head Office (a financial holding company) is located in Japan, has undertaken to carry out the full disclosure required by the above mentioned regulations. Disclosure will be made on an annual basis. The report may be obtained after the publication of the Annual Accounts, from the following address: Mitsubishi UFJ Investor Services & Banking (Luxembourg) S.A , route d Arlon, L-1150 Luxembourg. II. Overview Due to various changes in the global market and current trends in investment funds, it was necessary to adapt our business model during this past year. As per client requests, new client services have been implemented which further broaden the scope of oversight and the importance of Risk Management at MIBL. The Bank updates and implements in its policies, procedures, and processes, methods to identify, categorize, measure, monitor, and mitigate the risks linked to its business lines. The Bank remains risk averse and does not engage in proprietary trading for its own account. III. Risk Classification The Bank has identified the following risks present in its businesses and operations: 1. Credit Risk Credit Risk defined as the risk to incur losses due to a decline in, or a total loss of, the value of assets (including off-balance sheet assets) as a result of a counterparty failing to meet its obligations in accordance with agreed terms. Given the nature of MIBL business, credit risk is mainly defined by two sub-categories: Counterparty (default) risk covering: settlement risk, counterparty default on FX market exposure (generating replacement costs) or cash placements at risk due to counterparty default. Country risk - arising from uncertainties in economic, social, political or other external factors that could have an impact, such as a downgrade of the credit rating. 2. Concentration Risk The risk of an accumulation of exposure(s) within or across different risk categories of an institution that have the potential to produce either losses large enough to threaten the institution s health and/or ability to maintain its operations, or to produce a material change in an 50

52 Anna na Stowe Travel /Alamy institution s risk profile. The concentration risk is quantified using the Lower Partial Moment approach (LPM) in the stress test models. 3. Market Risk Market Risk defined as the risk of financial loss due to a decline in the value of assets, or the increase in the value of liabilities, including off-balance sheet items, as a result of fluctuations in market rates (FX rates, interest rates), prices, indices, and volatilities. The Bank has defined two general sub-categories of Market Risk, namely: Interest Rate Risk arises as a result of changes in interest rates; both assets and liabilities may impact the profitability of the Bank; Foreign Exchange Rate Risk defined as the risk of a loss following changes in the market foreign exchange rate on the Bank s transactions. 4. Liquidity Risk The Bank has identified two types of liquidity risk: market liquidity risk and funding liquidity risk. Market Liquidity Risk defined as the risk of sustaining a loss due to the inability to trade required quantities at a reasonable price, caused, for instance, by market turmoil or a lack of trade volume in the market. Funding Liquidity Risk defined as the risk of sustaining a loss due to the inability to obtain the necessary funds required for trading or settlement of obligations, or the need to acquire funds at disadvantageous terms, caused by deterioration in market conditions and/or in the Bank s financial standing. 5. Operational Risk Operational Risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal process, people, and systems, or from external events. This includes: Operations Risk defined as the risk of incurring losses caused by negligence of correct operational processing or by incidents or misconduct by officers or staff IT Risk defined as the risk of sustaining a loss due to IT system destruction, disruption, leakage, errors or similar events. Outsourcing Risk defined as the risk of sustaining a loss due to a failure in delegated activities, because they were not carried out properly or not in accordance with contractual arrangements. 6. Compliance & Legal Risk Compliance and Legal risks are defined as the risks of loss due to a failure to conduct the business in accordance with applicable laws, rules and standards or due to inappropriate or insufficient response to regulatory changes. It covers a variety of component risks such as litigations, sanctions, together with certain aspects of Operational Risks, across the complete range of the Bank s business activities. 7. Reputational Risk The Bank defines reputation risk as the risk of sustaining a loss due to an impaired reputation, caused, for instance, by negative perceptions and rumours among the Bank s clients and in the general marketplace, or by an inadequate response of the Bank to events arisen within the course of the Bank s business activities. This affects the Bank s ability to establish new relationships or services or to continue existing servicing relationships. 8. Remuneration and Personnel Risk Personnel risk is defined as the risk of loss due to high turnover of human resources, lack of training, lack of ethics and degradation of morale, as well as other similar behaviors. Remuneration risk is triggered by an inappropriate remuneration policy of the Bank, allowing abusive personnel compensations that are not tied to the financial results of the Bank, nor to the performance of its employees. IV. The Strategies and Processes of Risk Management 1. One of the basic functions of the Bank s Risk Control is to monitor the risks linked to the Bank s activities and business strategies that are within the control of the Board of Directors, and to the greatest extent possible to predict, mitigate, and manage the risks of the Bank using a predefined standard or method whenever possible. 2. The major objective of comprehensive risk control is not only to maintain preventive measures against business risks, but also to include all departments in its analysis ANNUALREPORT2015 APPENDIX 2 51

53 APPENDIX 2 and thereby to improve operations through more efficient processes and systems. Other aims are to identify all potential risks the Bank may face, evaluate the scope and the appropriateness of the controls put in place to assess these risks, and determine an action plan to eliminate weaknesses. 3. The Risk Management Department utilizes and has documented detailed methods in the Bank s policies, procedures, written rules, and other documents in its efforts to monitor and manage the risks noted above. The departments where these risks are generated periodically review these written papers, and amend or abolish them in accordance with changes in the Bank s operating environment. V. The Structure and Organization of the Risk Management Function 1. The Board of Directors and General Management The Board of Directors is responsible for deciding and approving the basic framework and strategies of the Bank s internal risk control management, implemented throughout the Bank, and to confirm its implementation. The Board of Directors determines the usefulness and efficiency of the risk controls in place using risk control reports delivered regularly, and judges if the controls comply with the approved limits and measures. On behalf of the Board of Directors, General Management creates a risk verification and management framework, which remains independent from the Bank s profitearning units, and allocates the skilled management resources required for carrying out the necessary controls and functions. For this purpose, General Management establishes policies, standards, and procedures for risk control and management. In addition, General Management reviews risk control and management plans, organization structures, policies, and procedures so that the Bank s risk management framework evolves consistently with changes in the Bank s businesses, international markets, and Best Practices in Risk Management. Employees are assigned to departments and tasks according to their professional experience and academic background. These assignments are approved by the General Management. Chief Risk Officer The Chief Risk Officer (hereafter CRO ) title is assigned to the director carrying out supervisory management of the Risk Management Department (hereafter the RMD ), which is the department responsible for comprehensive Risk Management, encompassing all risk categories. The CRO is responsible for a complete assessment of MIBL s risks, and for managing these risks adequately. The CRO reports risk control and management methods and plans the Bank s overall risk status to the Board of Directors, General Management, and to the Risk Management Committee. 2. Risk Management Department (RMD) The RMD is responsible for the selection and execution of an adequate risk management structure. On a daily basis, the department identifies, measures, controls, and monitors all risks within defined and controllable limits. These actions attenuate risks across MIBL s businesses, and thereby provide stability to earnings and risk awareness in the allocation of resources. 3. Risk Management Committee The primary responsibility of the Risk Management Committee is to review, discuss, and approve the Bank s Risk Management activities. In particular, and in congruence with the Bank s businesses, the Committee discusses Financial Risk (Credit & Market Risk) and Operational Risk and puts forth policies to avoid losses due to these risks. Its members discuss quantitative, as well as qualitative, methods of managing the Bank s risks. 4. Credit and ALM Committee (For Credit Risk, Market Risk, and Liquidity Risk) The primary responsibility of the Credit and ALM Committee is to establish an appropriate implementation and a functioning management structure for Credit Risk, Market Risk, and Liquidity Risk. On a monthly basis, its members monitor, and if necessary make decisions regarding, both MIBL clients assets and the Bank s assets. 52

54 Anna na Stowe Travel /Alamy RISK MANAGEMENT ORGANIZATION 2015 Board of Directors General Management Chief Risk Officer Risk Management Department GENERAL ADMINISTRATION COMPLIANCE DEPARTMENT LEGAL DEPARTEMENT HUMAN RESSOURCES DEPARTMENT OPERATIONAL DEPARTMENTS RISK MANAGEMENT COMMITTEE CREDIT & ALM COMMITTEE EXTRAORDINARY RISK MANAGEMENT COMMITTEE VI. The Scope and Nature of Risk Reporting and Measurement Systems The Bank s process for control and managing its diverse categories of risk comprises several levels and phases. A nonexhaustive description of its methodology follows: 1. Detection of Risks This step includes the identification of the characteristics of the Bank s individual risks, which include, but are not limited to, their type(s), location(s), source(s), and interdependency(ies). 2. Risk Assessment and Computation This step includes a comprehensive evaluation of the source of risk, using both quantitative and non-numerical methods, at the transaction, portfolio, and overall structure levels of the individual risk. 3. Risk Control Risk Control at MIBL involves the process of examining and updating approvals, limits, thresholds, operational processes (for example, standing instructions), escalation processes (and exceptional treatment rules), and risk attenuation methods (haircuts, collateral, netting calculations, ratings, etc.). These are contained and updated in MIBL policies, rules, procedures, and practices. MIBL s Head Office, E.U. regulations, CSSF circulars and regulations, and Luxembourg laws also act as inputs into MIBL s policies. 4. Risk Monitoring and Reporting The Risk Management Department is in charge of updating the risk processes, monitoring of the risk status and exceptional treatment of individual risks, and reports to General Management and Risk Management Committee. The Committee reports to the Board of Directors on a quarterly basis. ANNUALREPORT2015 APPENDIX 2 53

55 APPENDIX 2 VII. The Policies for Mitigating Risk and the Process for Monitoring Risks 1. Credit Risk Monitoring Credit Exposure and Limit Monitoring The RMD carries out verifications of the current credit exposure compared to the approved credit limit. The report indicates a warning, e.g. a color signal, when the usage of the limit is above 80% of the total limit amount. In this event, the RMD transmits a message to the appropriate department to take remedial action as soon as possible. If the limit is breached, a report is forwarded to the General Management. The Bank uses a banking system which allows an ondemand monitoring of credit limits. All transactions that would transgress the relevant credit limit put in place cannot be processed without the express authorization of the Risk Management Department. The control on credit limit breaches is made possible through the Visa Control system put in place by the Bank. In the event the RMD is requested to approve using Visa Control, an exhaustive analysis of the credit limit breach is carried out. The result of this analysis will be transmitted to General Management before releasing or rejecting the transaction. Credit Limit by Counterparts The Bank applies the limit to Mitsubishi UFJ Trust and Banking Corporation (hereafter MUTB ), following the Managing Director s approval. Credit Limit Control The RMD controls the Bank s credit limits. Once the credit limit has been authorized by MUTB, the RMD forwards the approval to the General Management. All approved limits are set up in the Banking system. The RMD reviews these limits once a year, or more frequently as necessary (e.g., in case of breach). Monitoring Credit Rating for Counterparts The Bank verifies the credit ratings of all counterparts that have a deal or custody agreement with the Bank. Credit Risk Stress Testing The Bank put in place a Credit Risk Stress Test model, using macro-economic and financial market data (e.g. GDP, unemployment rates, interest rates, FX rates, exchange indices, bankruptcy indices etc.) to infer stress factors applied on the Probability of Defaults (PDs) and create a credit loss distribution. For the stress test, hypothetical and historical scenarios (including concentration risk) are considered and applied on the banking credit portfolio: mild recession scenario occurring by assumption once in 10 years, the severe recession scenario occurring once in 50 years, the historical 9/11 event, the historical Lehman bankruptcy. Country Risk Monitoring The RMD monitors the counterparts country risk by checking country ratings using a Bloomberg Station. 2. Market Risk Monitoring Interest Rate Risk Interest Rate Risk may be defined as the risk of loss due to the gap (i.e. difference) between assets and liabilities on the Balance Sheet that are exposed to interest rate fluctuations. Interest rates are influenced by a variety of factors, such as politics, international news, and the general economic climate of countries. The Bank performs sensitivity analysis on its economic values taking into account positive and negative shifts on all interest rates (parallel shift of yield curves). The aim of this analysis is to determine to which extent Interest Rate Risk is likely to result in a decline in the economic value of the institution. The Bank applies interest rate shocks to all its treasury flows taking into account the following parameters: residual maturity, contract rate, market rate, and nominal amount. International changes, such as the trend toward the liberalization of interest rates in the developing world and large money movements into speculative funds in recent years, have added a higher variability to interest rates than they showed in previous years. This has caused Asset & Liability Management to take on a relative position of importance in the area of Risk Management. 54

56 Anna na Stowe Travel /Alamy Asset & Liability Gap Placement Monitoring MIBL s Funding Liquidity GAP is verified on a daily basis using an automated tool. The Funding Liquidity Report, issued by the tool, is sent to General Management and submitted to a Four-Eyes verification on a daily basis. In the daily computation of the GAP, a certain amount of core cash is considered to remain on clients accounts for a longer, more stable period of time. The amount of core cash at MIBL has increased to 980 million, based on the augmentation in customer cash accounts seen in recent years. GAP placement limits have been set by the MUTB Head Office as follows: Time Period Limits - < 1 month 980 Million - < 6 months 900 Million - < 1 year 500 Million The Credit and ALM Committee monitors on a monthly basis the Bank s respect of the Gap Placement Policy. Foreign Exchange Rate Risk Daily Control In general, the total foreign exchange position of the Bank is equal to 0 (or squared ) at the end-of-business each day. A maximum net position of is allowed at day s end when, due to client transactions, this amount could not be squared. As a matter of practice, the Bank seeks to have the entire FX position squared to the furthest extent possible. As part of its daily controls, the RMD issues the Forex Forward Net Short Position Report (showing the Bank s forward transactions with clients) and the Net Short Position Report (for Spot transactions). Hedging Salary and General Expense Items As part of the Bank s policy for avoiding risk, it hedges personnel salary costs and general expenses, denominated in EUR on the Balance Sheet. As part of the Special Purpose Forward Position Limit, which has been defined as an internal rule, the Bank is allowed to mitigate the risk of an increasing EUR by hedging these amounts against, which is the Bank s Balance Sheet currency. The decision to do so is taken at Credit and ALM Committee, which convenes monthly. Year-End Hedging As of December 31st of each year, all expenses or holdings not denominated in have to be hedged to avoid Foreign Exchange Risk (currencies against ). As a matter of practice, and due to its risk-averse stance in its businesses, the Bank has virtually no other market risks, i.e. no stock prices risk, commodity price risk, or market liquidity risk. 3. Liquidity Risk Monitoring The Bank s transactions are continuously monitored with respect to their adherence to its internal liquidity rules and to the current regulations in place. Introduced by the regulation (EU) No 575/2013 of the European Parliament, the liquidity coverage requirement will be gradually implemented starting from October 2015, with a first minimum requirement fixed at 60%. The Liquidity Coverage Ratio (LCR) ensures that banks have an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be converted easily and immediately in private markets into cash to meet their liquidity needs for a 30 calendar day liquidity stress scenario. LIQUIDITY COVERAGE RATIO (LCR) as of 31/12/2015 in A. High Liquidity Assets B. Inflows C. Outflows D. Capped Inflow (Max 75% Outflows) E. Inflows for LCR (Minimum (B) or (D) F. Net Cash Flow (C)-(E) ANNUALREPORT2015 APPENDIX 2 55

57 APPENDIX 2 G. Liquidity Coverage Ratio (A)/(F) 284,53% H. Minimum Requirement at ,00% I. Minimum Requirement met OK During the year 2015, the Bank has reported the liquidity coverage ratio to the competent authorities. The Bank already fulfils the minimum requirement as of December 31, The Bank performs quarterly stress-testing of liquidity risk, simulating extreme market conditions in order to assure that high impact events are easily absorbed. 4. Prudential ratios As introduced by the requirements of Directive 2013/36/EU / Regulation EU No 575/2013, the Bank calculates and monitors the prudential ratios. Besides the LCR presented above, the Bank ensures that Net Stable Funding Ratio (NSFR) and Leverage Ratio (LR) are being monitored, although as per December 31, 2015 there is no level requirement applicable. 5. Operational Risk Monitoring As a component of its Operational Risk monitoring framework, the Bank carries out yearly Control Self- Assessment (CSA) workshops. The Operational Risks of each business line are identified, measured, and controlled. When remedial or preventive measures are necessary to attenuate risks, the RMD in collaboration with General Management, conceives of and implements an action plan. As part of group-wide management, the Bank collects, measures, and analyzes loss data, if any, which includes financial losses, derived from operational error events. Operational mishandling refers to errors identified as being caused by negligence in processing and/or disrespect of the Bank s internal rules and procedures, or normal commercial customs and practices. The Bank has put in place an incident and an accident reporting procedure that is especially designed to enable MIBL to carry out corrective actions by reporting promptly the detail of each incident or accident to the Bank s General Management. The below-listed cases are taken into consideration: - wrongful acts, - cash accidents, - operational errors, - accidents in the course of business activities, - system inconsistencies ( bugs ) and disturbances ( shut-downs ), - violations of relevant laws, - complaints, - lawsuits, and - accidents not related to business activities. MIBL uses these reports to recommend and implement improvements in collaboration with its parent company. The aim of the improvements is to prevent recurrence of analogous or related cases and to create awareness amongst the Staff of Operational Risk issues. All accidents are promptly reported upon discovery, and follow-up measures are carried out as appropriate. As the Bank considers Operational Risk as one of the most important risks it is currently exposed to, stress tests are performed quarterly using the Operational Risk Loss Simulation (ORLS) model. The model is built on the experience gained from the internal incident reports and is designed to create severity classes in loss intervals and assigning likelihoods for the loss ranges (Insurance Mathematics). Based on this model, the Bank calculated a Pillar II requirement for Operational Risk (including outsourcing, compliance and legal risks) of VIII. Equity Investments Held Fair value of shares in affiliated undertaking recorded as Equity instrument under IFRS. MUFG Lux Management Company S.A Company established under the laws of G.D. of Luxembourg. The objective of the company is the administration and management of investment funds established in Luxembourg and abroad. Mitsubishi UFJ Investor Services Limited Company established under the laws of Japan. The objective of the company is to promote MIBL s custody business in Japan, and to support clients residing in Japan. 56

58 Anna na Stowe Travel /Alamy Total Fair Value of Equity Investments Equity investments are not consolidated and are excluded from the own funds. Additional information is given in the Note Transferable Securities in the annual accounts. IX. Regulatory Capital Requirements As required by E.U. Directive 2013/36/EU and E.U. Regulation 575/2013, the Bank maintains eligible own funds at least equal to the amount of its overall capital requirements. The minimum required ratio is 10,5%. As of December 2015, the Bank s ratio is 16% after dividends payment. The Bank applies the Simplified Standardized Approach for the Credit Risk and the Basic Indicator Approach for the Operational Risk. This ratio is calculated and communicated to the CSSF on a quarterly basis. All items included in the calculation of the credit risk are extracted from the accounting records of the bank. The ratio (expressed in percentage terms) is calculated using the following formula: - the numerator consists of eligible capital ( own funds ) of the Bank, - the denominator is composed of assets, risk-adjusted by means of percentage weightings that express the degree of credit risk and the capital requirement for Operational Risk. The details of the capital adequacy ratio calculation as at December 31, 2015 are presented below. A) Own Funds for solvency 2015 Issued Capital Reserves (including profit brought forward) Income from Current Year Previous year retained earnings Intangible Assets Amount Deducted from Own funds (Tier 1) Fair value of shares in affiliated undertaking recorded as equity instruments under IFRS Own funds Dividends Payable Total Own Funds for the Solvency Ratio of wich Trier of wich Trier B) Capital Requirements Capital requirement for Credit Risk Capital requirement for Operational Risk Total Capital Requirement > Capital Requirements for Credit Risk Capital requirements for Credit Risk are decomposed as follows: Counterparty Capital Requirement Credit Institutions Corporate Others & Equity Total In accordance with E.U. Regulation 575/2013 of June 26, 2013, exposures to credit institutions for which a credit assessment by a nominated ECAI is available shall be assigned that risk weight given by the nominated ECAI according to article 120 of the Regulation. Exposures to institutions for which a credit assessment by a nominated ANNUALREPORT2015 APPENDIX 2 57

59 APPENDIX 2 ECAI 1 is not available shall be risk-weighted in accordance with article 121 of the Regulation. As an example, pursuant to article 120 of E.U. Regulation 575/2013, risk weights for exposures with a residual maturity of more than three months at institutions rated by a nominated ECAI are allotted risk weights according to the table below. Credit Quality Step Risk Weight 1 20% 2 50% 3 50% 4 100% 5 100% 6 150% CEBS GL07 provides mapping from the Credit Quality Steps above to ECAI ratings. For example, for long-term credit assessments, for Moody s, CEBS GL07 indicates: Credit Quality Step Moody s Rating 1 Aaa to Aa3 2 A1 to A3 3 Baa1 to Baa3 4 Ba1 to Ba3 5 B1 to B3 6 Caa1 and below > Capital Requirements for Operational Risk The capital requirements for Operational Risk calculated in accordance with the Basic Indicator Approach are presented as follows: Net Interest Income Net Fee & Commission Income Net FX Trading Result Dividends Realized Gain on Financial Assets Other Operating Income Total Gross Result Average over 3 years Basic Indicator Approach: 15% Capital Requirement ECAI is an acronym for External Credit Assessment Institution. 58

60 Anna na Stowe Travel /Alamy C) Capital Adequacy Ratio Own Funds for Solvency (A) = X 8% = 16% Capital Requirements (B) During the financial year 2015, the Bank held regulatory capital well above the required minimum standards. X. Other Disclosure Requirements > Determination of Value Adjustments and Provisions It is the Bank s policy to assess exposures on an individual basis and to establish specific value adjustments with respect to doubtful and irrecoverable debts. As at December 31, 2015, the Bank was not exposed to doubtful and irrecoverable debts and there was no need to establish specific value adjustments. > Credit Risk Exposure Quantitative information on credit risk exposure by class and residual maturity and geographic location is given in the Financial Instrument Disclosures of the annual accounts, Notes 29.1 and 29.3 Stress tests are computed are quarterly as at the 31st March, 30th of June, 30th September and as at the 31st of December of each year. The outcomes 31st of December are calculated and reported to the Luxembourg regulator (CSSF) in the ICLAAP 2 Report, based on the Bank s individual status as a credit institution established in Luxembourg, and not on a consolidated basis. The Bank is not subject to CSSF control on a consolidated basis. As a result of the December 2015 stress tests, the worst case scenario result was > Interest Rate Risk Exposure The Bank s potential exposure on a Mark to Market basis for Interest Rate Risk is low. Due to the short term maturities of assets and liabilities, a change of interest rates would mainly impact the Bank s short-term future earnings (EaR). The Bank has implemented a stress test on interest rates in order to comply with the provisions of the CSSF circulars 07/301, 08/338 and 09/403.The stress test aims at quantifying the variation of the value of an institution s wealth when interest rates change. Requirements to Calculate and Report the Stress Tests on Interest Rates The interest rate scenarios applied are an increase and a decrease of 200 basis points on all interest rates to which the Bank is exposed. The transactions utilized in the stress scenarios include, but are not limited to, customer cash deposits and OTC derivative contracts written on the client s request. The Bank applies the interest rate shocks to the stated transactions taking into account the following parameters: residual maturity, contract rate, market rate, and nominal amount. Stress tests are computed semi-annually as at the 30th of June and as at the 31st of December of each year. The outcomes are calculated and reported to the Luxembourg regulator, the CSSF, based on the Bank s individual status as a credit institution established in Luxembourg, and not on a consolidated basis. The Bank is not subject to CSSF control on a consolidated basis. As a result of the December 2015 stress tests, the scenario results of the 200 basis points increase delivers a gain of ,72, and the scenario results of the 200 basis points decrease delivers a loss of ,37. > Internal Capital and Liquidity Adequacy Assessment The Bank has created the risk surveillance and reporting framework described in sections V and VI of this disclosure. This framework has been created to permit the Bank to accurately evaluate its internal capital in terms of its current and future businesses. The Board of Directors, General management, the CRO, and the Risk Management Committee receive regular reports and updates on the Bank s risk profile, its numerical values, and capital needs in order to ensure: - sufficient capital is held against the Bank s various risks, also under economic downturn scenarios - qualitative judgment as well as quantitative measurements are used based on stress test scenarios and simulation models as part of the foundation of the Bank s capital estimation system, and 2 ICLAAP Internal Capital and Liquidity Adequacy Assessment Process ANNUALREPORT2015 APPENDIX 2 59

61 APPENDIX 2 - prospective capital requirements based on the Bank s risk profile and strategic plans are adequately monitored and planned for. > Derivative Non-Trading Financial Instruments As at December 31, 2015, the analysis of OTC derivative nontrading financial instruments (the Bank has no proprietary trading portfolio) by class, residual maturity, and geographic location is given in the Financial Instrument Disclosures of the annual accounts, Notes 29.2 and